Since the 1990s, borrowers have had access to commercial mortgage-backed securities (CMBS) loans, which are increasingly in demand. These loans are useful for those looking to purchase a sizable commercial property. CMBS loans can be used for various property types, including apartment complexes, hotels, and shopping centers.

What Are CMBS Loans?

CMBS loans are secured by a first mortgage on a commercial property. Traditional CMBS lenders include commercial banks, conduit lenders, and investment banks. Standard amortization periods for CMBS loans are 25 to 30 years, and loan terms are 5 to 10 years.

CMBS Loans Pack a Double Punch

CMBS loans combine two asset classes. In the beginning, the loan is structured like a regular mortgage. After a lender approves a borrower’s loan application, the mortgage is added to a portfolio along with many other borrowers. Properties in the portfolio may include everything from grocery stores to movie theaters and may be located in a wide variety of markets. Bonds are issued by the trust whose value is determined by the portfolio’s worth of loans. The bond yields, maturities, and payment schedules are as varied as the properties themselves. The trust accumulates interest when the principal is repaid, and bondholders get interest payments proportionate to the bonds they own. Generally, bondholders are compensated from the highest to the lowest grade.

Advantages of CMBS Loans

CMBS loans may be a good fit for buyers looking for high-value commercial real estate property. Bankers tend to be more cautious than investors. In general, the underwriting terms for CMBS loans are more flexible than those on conventional mortgages because these loans are seen as investments. A person with a proven track record of success in commercial real estate investing but limited financial resources can easily get approval.

Due to the mortgages being issued as securities, the prepayment terms are also different from those of a standard loan. There needs to be a compromise because bondholders won’t get their expected rate of return if the loan is paid off early. In most cases, borrowers will be “locked in” to the debt for several years. When the loan’s lockout period ends, a defeasance repayment strategy that involves replacing cash with securities may become an option.

Bottom Line

A CMBS loan may be your best option if you’re planning to make substantial investments or want more flexible repayment terms. If you want the best conditions on your CMBS loan, reach out to Brave Capital Funding today.